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A Closer Look at Baker Hughes’ Solid Third Quarter

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Last week, oil-field services provider Baker Hughes (NYSE: BHI  ) reported its third-quarter financial results, which were quite impressive by most measures. Let's take a closer look at what factors and markets drove the company's solid performance and what investors can expect going forward.

What drove Baker Hughes' robust performance?
Houston-based Baker Hughes reported record revenues of $5.8 billion, up 5.5% from the year-earlier quarter, while net income surged 22% year over year to $341 million. Similar to rival Schlumberger (NYSE: SLB  ) , the company's strong quarterly performance was driven by its international operations – an area in which it has historically lagged behind deeper-pocketed peers such as Schlumberger and Halliburton (NYSE: HAL  ) .

In its operations outside North America, Baker Hughes reported record revenues of $2.6 billion, up 4.5% sequentially and 13.6% year over year. International operating profits surged to a record $364 million, up $96 million or 36% from the second quarter of this year, driven by record revenues from the company's operations in the Eastern Hemisphere and its Middle East/Asia-Pacific segment.

Meanwhile, the company's North American revenue came in at $2.9 billion, up $177 million or 6.6% sequentially, as margins improved to 10.3% in the quarter, up a staggering 245 basis points from the second quarter of this year. This solid performance was driven mainly by the seasonal recovery in Western Canada, as well as a slight improvement in the U.S. pressure pumping market, where Baker Hughes has a leading position in water management services.

Still, despite Baker Hughes' commendable efforts to expand internationally, its foreign presence pales in comparison to Halliburton and Schlumberger. Schlumberger is the clear leader internationally, generating more than two-thirds of its sales from markets outside of North America, while Halliburton has posted the best year-over-year growth in international revenue compared to its peers for six consecutive quarters.

Catalysts for future growth
Looking ahead, I see a few important catalysts that could help propel Baker Hughes' stock -- which has remained below Schlumberger and Halliburton over the past year -- even higher.

First is its improving position in international markets, especially the Russian Caspian, where it is providing drilling services on a record number of rigs and will continue to its expand drilling and evaluation services. Another opportunity is the Asia-Pacific region, where demand for drilling and wireline services, as well as artificial lift and drill bits, from customers in China, Malaysia, and Vietnam should continue to grow.

Second, despite the recent weakness in the North American pressure pumping market, Baker Hughes' leadership position in water management services should prove to be a major competitive advantage going forward, given the shortage of water in key plays such as the Eagle Ford and the Permian Basin.

Lastly, given the rising service intensity and technological complexity of the global E&P industry, Baker Hughes' renewed emphasis on technological solutions -- including its FLEX series of electrical submersible pumps, its StayCool multidimensional cutter, its FASTrak logging-while-drilling fluid sampling information pressure testing service, and a host of other products and services -- should help the company become more competitive against Halliburton and Schlumberger, which have far bigger research and development budgets.

A great quarter, and cause for optimism
Overall, this was a truly spectacular quarter for Baker Hughes, which not only beat analyst expectations but also its own guidance for profits. While it's true that Baker Hughes remained behind Schlumberger and Halliburton in expanding internationally, this quarter is evidence that the company is rapidly making up for its relatively late entrance into high-growth markets in the Middle East and the Asia-Pacific region.

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9/23/2016 4:00 PM
BHI $49.24 Down -0.91 -1.81%
Baker Hughes CAPS Rating: ***
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SLB $75.92 Down -1.09 -1.42%
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